Quae nocent docent

Here ya go, federal budget she is fixd. Now we just need to overthrow democracy to be able to implement it.

I am frustrated by the common misperception that being a fan of capitalism necessarily means pandering to corporations. I am a capitalist through-and-through, but I am also strongly critical of the destructive subsidies and tax breaks that many companies have finagled. I believe in freedom and a level playing field. I do not believe in corporate welfare or hiding giveaways in our labyrinthine tax code.

Our corporate tax system is broken, and we're continuing to make it worse. I've already complained about one of the most nauseating examples of this. That JOBS bill passed, of course, in its disgusting form. Narrowly targeted corporate welfare is only part of the story, of course. We are also exacerbating the dangerous moral hazard created by sloppy pension insurance.

Another fine example of a broad tax code insanity is our taxation of corporate profits made in other countries. This is a weird species of imperialism that other countries don't engage in, and the result is massive distortion of foreign direct investment, job creation, and international trade. The fix is simple, straightforward, and highly unlikely.

I have discussed the ridiculous debate over offshoring elsewhere, but I can summarize in one sentence. You can't pack a container ship full of jobs and ship them to other countries. The offshoring argument is central to our wacky tax policy. As long as people believe that there is a lump of labor, fixed in size, to be divided up between countries, people will want to use the corporate tax code as an instrument of trade policy, trying to prevent the export of jobs.

What is it that we're currently doing? Unlike other countries, we tax American corporations' global profits. This is silly in itself, but we make it sillier. We don't collect taxes on those profits until the income is brought home to the USA. With our corporate tax rate of 35%, this creates a powerful incentive to retain those earnings outside the USA. Profits that could be productively reinvested here are instead left overseas and used by foreign subsidiaries to expand operations. Some have estimated the amount of money left outside the US at $600 billion. Truth 4: People Respond to Incentives.

There's nothing wrong with buying more equipment or hiring more labor in other countries, but capitalism works poorly if you create a situation where companies invest in ways that are less efficient. Even if a domestic investment would be more profitable in the absence of tax effects, this distortion makes it preferable to invest in less productive ways in other countries.

As an aside, John Kerry proposed eliminating the loophole. That plan would have merely made things worse; then we would have a situation where an American company in Taiwan shipping chips back home would face punitively higher tax rates than a Japanese company doing the exact same thing.He claimed this would keep more jobs here in America. Even if we ignore the erroneous lump of labor assumption, his idea would simply encourage us to buy even more products from abroad, adding to our already unsustainable trade deficit.

The fix is simple. Stop taxing money made in other countries. If profits are made in Ireland, let Ireland be the only country that taxes them. Don't create perverse distortions that discourage investment here. Job creation does not depend on strange rules or attempts to avoid exporting jobs. It does depend on our investment in physical capital and human capital. Truth 8: A Country's Standard of Living Depends on its Ability to Produce Goods and Services